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Robert Rubin's Contested Legacy

In an Uncertain World: Tough Choices From Wall Street to Washington By Robert Rubin and Jacob Weisberg, Random House, 448 pages, $35.00

If a Democratic president gets to replace Federal Reserve Chairman Alan Greenspan when the latter's term is up in 2006, Bob Rubin is the odds-on favorite. He has the financial credentials: Goldman-Sachs, U.S. Treasury, CitiGroup. He raises money for Democrats. And he is credited with the one accomplishment of the Clinton era that all Democrats are proud of: eight years of peacetime economic growth that, by 2000, had produced something pretty close to full employment.

As Rubin tells the story in his new memoirs, he persuaded Clinton early on to make financial-market "confidence" the administration's chief economic priority. Key to the strategy was Greenspan, who was supposedly concerned that spiraling federal deficits would ignite inflation, forcing him to raise interest rates and thus choke off growth. Cut the deficit, argued Rubin, and Greenspan will let the economy live.

Clinton was an easy sell. He not only reduced the deficit but also went on to balance the budget, run a surplus and, by the end of his term, put the federal government on a path toward eliminating the entire national debt. Along the way, he embraced large parts of Wall Street's agenda: free trade, privatization and the deregulation of finance, energy and telecommunications. In turn, Greenspan kept rates low.

So Rubin's plan worked, but the cost was high. Hopes that the peace dividend from the end of the Cold War would finance major new programs in health care, education and other areas of public need were dashed. Social investments as a share of the country's national income actually declined over the Clinton years. Fights over free trade split the party and contributed to the loss of the House of Representatives, from which Democrats have still not recovered. And deregulation led to an orgy of irresponsible speculation and fraud that eventually left workers without pensions, small-scale shareholders with worthless paper and California -- among other places -- without the money to pay for basic services.

While the party lasted, Rubin and Greenspan were the toasts of Wall Street. They watched benignly (with an occasional "tut-tut" from the chairman) as mindless speculation overheated the stock market way beyond the boiling point of 1929. According to Greenspan, inflation was no longer a problem because the end of the era of coddling by big government had made workers more anxious about their jobs and less apt to demand higher wages. At the same time, he and Rubin kept anxiety from discomforting the markets by rolling out the safety net for financiers who bet wrong on Mexican bonds and the Long-Term Capital Management hedge fund. Indeed, Rubin spent much of his term as treasury secretary shuttling from crisis to crisis, organizing, often brilliantly, rescue packages for capital-market failures around the world.

He missed some. Russia defaulted despite his best efforts. And neither he nor Greenspan faced the rising U.S. trade deficit that, by the end of his watch, made our high consumption economy perilously dependent on foreign lenders.

Still, more than 20 million jobs were created. At the end of the decade, people who 10 years earlier had been written off as "unemployable" were working, and, for a few quarters before the crash, employers were actually bidding up the wages of people making $7 an hour.

So, honest liberals might have different answers to the question, was the "trade off" worth it? But there is a prior question: Was it necessary?

Some deficit reduction was reasonable. After all, a fiscal deficit that was rising faster than income is ultimately unsustainable. But the Clinton-Rubin buy-in to a 19th-century Republican economic agenda was clearly over the top. As Clinton economists Joseph Stiglitz, Alan Blinder and Janet Yellen, among others, have pointed out, the sustained growth of the past decade was largely generated by a perfect storm of favorable factors, including the spread of Internet technology, low energy prices and a temporary slowdown in health-care costs.

The clearest answer came from Alan Greenspan himself. A few days after the election of George W. Bush, Greenspan endorsed Bush's massive tax cut, which not only wiped out the surplus the Democrats had so painfully built up but quickly put the government back in the red. It turns out that the ideologically conservative Greenspan had used the deficit scare as a way to stop Clinton from social spending. When the Republicans came back, Greenspan was happy to support what has now become the GOP tradition of cutting taxes for the rich, no matter what the fiscal consequences.

Some would argue that Rubin and Clinton had no other leverage to keep Greenspan from killing the recovery. But they clearly had more wiggle room. Wall Street's worry was that the deficit was out of control. The Clinton administration could have mollified financiers' fears by cutting the deficit to something like 2 percent of gross domestic product. That would have freed up additional revenue for desperately needed public investment, and Greenspan would have been on weak ground to throttle non-inflationary economic growth. Moreover, Clinton had control over the one thing that Greenspan desperately wanted: reappointment. Had the president been willing to discipline the chairman with some of the job anxiety that kept America's workers in line during the 1990s, a few dollars of that now tragically lost surplus might have been invested in things such as schools, hospitals and clean air.

Compared with what we have now, of course, we'd be happy to have Rubin back. And if the country lucks out next November, he -- and we -- may get another chance. So I'd be a lot more comfortable if his book had at least acknowledged that he helped Greenspan take us to the cleaners. The next Democratic administration should not be condemned to repeat the mistakes of the last one.